There is a big legal difference between a sublease and an assignment and recent case law reminds us why.
In V Hazelton Limited v. Perfect Smile Dental Inc., the tenant, with the landlord’s permission, decided to relocate his business and sublease his unit to a subtenant. The sublease did not reserve the last day of the term of the tenant’s lease, which meant that both the sublease and the head lease were to expire the same day. The sublease also expressly denied the subtenant the right to exercise the original tenant’s renewal option.
After some time, the original tenant wanted the unit back and advised the landlord that, once the sublease was over, the tenant would be exercising its right to renew the lease. The landlord, however, refused to accept the request to renew, claiming that the tenant had assigned, not subleased, the lease.
This meant, according to assignment law, that the tenant had lost all of its rights under the lease, including the right to renew. The tenant argued that the “less a day” rule to distinguish a sublease from an assignment was immaterial because the conversation between the parties was clear that the intention was to create a sublease. The parties went to court.
What’s the difference between a sublease and assignment?
An assignment is the transfer of the original tenant’s entire interest in a lease to a third party. This means that when the tenant assigns its lease, the assignee takes over the tenant’s rights and obligations under the lease and deals directly with the landlord. In other words, after an assignment is completed, the original tenant loses its ability to exercise any of the rights it used to have under the lease.
This is different from a sublease where the original tenant retains all of its rights and obligations under the sublease (generally, called a “revisionary interest” whereby the original tenant maintains an interest in the land). This means that the subtenant doesn’t have a relationship with the landlord and the original tenant hasn’t given up its rights under the lease to occupy the unit and exercise any rights it has, such as an option to renew.
The common way we distinguish a sublease from an assignment is by making the term of the sublease one day less than the term of the lease. The tenant in V Hazelton Limited v. Perfect Smile Dental Inc., however, didn’t do this. The tenant claimed that this error shouldn’t be used against it as it was clear during the negotiations that the relationship was to be that of a sublease and not an assignment. The application judge agreed with the tenant. The landlord appealed.
The Court of Appeal decided in favour of the tenant because case law made it clear that “some courts have interpreted the notion of a reversionary interest more expansively. In these cases, courts have found that there was a reversionary interest even where the last day was not reserved.” In other words, some courts have said that giving fewer legal rights than the tenant has under the lease to the subtenant is enough to show that the tenant has maintained a greater right or interest and hasn’t given up its interest in the land.
The Court of Appeal also reviewed a very confusing and often ignored section of Ontario’s Commercial Tenancies Act (CTA) – Section 3 – because, as some argued, Section 3 eliminated the “less a day” rule when distinguishing a sublease from an assignment. The Court of Appeal rejected this interpretation and claimed Section 3 is meant to allow for a sublease “even if the last day in the head lease is not reserved, but only where there is sufficient evidence to show that the objective intention of the parties, as reflected in the sublease, was not to create an assignment.” Since there was enough evidence that the tenant intended to retain its revisionary interest, the court ordered that the right to renew be honoured and that the subtenant vacate the premises in 30 days.
Why is this important and what can you do?
This case reminds us that there are real differences between an assignment and a sublease. The main difference is that an assignment nullifies the original tenant’s ability to exercise its rights under the original lease. This case also reminds us that case law is always contradictory. You don’t want to leave it up to the courts to decide the fate of you or your client because you don’t know if the outcome will be a good. As such, keep in mind these tips to ensure that you protect your clients:
- Always confirm in the agreement the nature of the agreement and title it accordingly as a sublease or an assignment. While this may not be the best result, this does ensure that you’re demonstrating some intention.
- Email, write and reconfirm in writing the intention regarding whether or not the original tenant is to reserve its contractual and estate interest in the property. Limit the scope of the subtenant’s rights to further support this position. This is because if the subtenant has less rights (for example, doesn’t have the right to renew the lease or exercise a co-tenancy right) than the original tenant, then a sublease may be inferred even if the sublease is for the entire term of the lease.
- Double check the dates. If you want to assign, it’s for the entire term. If you don’t, make sure that it’s less a day.
- If the tenant wants to sublease the lease for the entire term and not less a day, then make sure that the sublease provides for fewer rights to the subtenant than the lease provides for the tenant. For example, if the tenant has a right to renew, make sure that the sublease states that the subtenant doesn’t have the same right.